Question

Smith says that if government purchases rise by $100 billion, the AD curve will shift to the right. Jones says that if government purchases rise by $100 billion, the AD curve will not shift to the right. It follows that:_______.

Answer 1

Answer: Smith believes there will be an incomplete or a zero crowding out while Jones believes that there will be a complete crowding out.

Step-by-step explanation:

Crowding out is a situation whereby they increase in government expenditure in an economy has failed to lead to a rise in the overall level of aggregate demand. The reason behind this is that the increase in the government spending has resulted into an equivalent decrease in the private sector investment and expenditure and hence will not lead to an increase in the increase in aggregate demand.

In the scenario in the question, we can see that Smith believes there will be an incomplete or a zero crowding out because he is of the opinion that when the government purchases rise by $100 billion, it will lead to an increase in the the aggregate demand curve

while Jones believes that there will be a complete crowding out as there would not be a rise in the demand.